After the dual shocks of Covid-19 and natural disasters, Timor-Leste’s economy is showing some signs of recovery and this year’s gross domestic product (GDP) growth in real terms is expected to improve to 1.9 per cent.
According to the latest World Bank economic update, Timor-Leste Economic Report: Steadying the Ship, which was released earlier this month by the global lender based in Washington, DC, the Covid-19 situation in the republic has begun to improve as the novel coronavirus vaccine rollout continues to accelerate and case numbers drop.
Some 71 per cent of the 1.3 million population has received one dose and 57 per cent of has been fully (twice) vaccinated. However, disparity of vaccine coverage persists, with an average of 30 per cent of the eligible population vaccinated in many districts.
Receipts from sales and excise taxes rebounded while household credit expanded as public spending grew by 20.3 per cent year-on-year. Inflation increased to 3.6 per cent in the second quarter of this year, driven largely by rising food, beverage, alcohol, and tobacco prices.
However, non-oil GDP contracted by 8.6 per cent in 2020 and the government collected 11.3 per cent less domestic revenue during the first half of this year.
“The Covid-19 crisis came on top of a period of low growth, suggesting deeper structural problems in the economy,” said Bernard Harborne, World Bank Country Representative for Timor-Leste.
“Advancing the structural reform agenda can improve growth, competitiveness, and employment. Raising more fiscal revenues, the special focus of this issue, is a key step in ensuring a sustainable future for Timor-Leste.”
The economy is projected to expand further in 2022, driven by more manageable Covid-19 infections, and less restrictive public health measures.
On the demand side, a gradual rebound in private consumption (+2.9 per cent) will drive economic growth in 2022. Private investment is likely to remain low while global trade is expected to pick up further, positively affecting both exports and imports.
The Timor-Leste Economic Report includes a special focus on Domestic Revenue Mobilisation which highlights the importance of improving revenue mobilisation to finance public spending on development and poverty reduction.
The report recommends collecting more revenue by introducing value-added taxes and increasing income and excise tax rates to match regional norms.
Revenue administration can be improved by modernising the tax system. Estimates on the tax potential suggest that, if existing gaps in tax policy and administration are addressed, tax revenue collection could double from around eight to 15 per cent of GDP.